Chicago options market goes nuclear, files $525 million patent suit

In a long war between two options exchanges, patents are the most dangerous weapon.

There was a time, not long ago, when the titans of the US financial world ran away from patents. During the Bilski case, big banks filed an amicus brief (PDF) on the same side as Google, asking the Supreme Court to disallow so-called "business method" patents to no avail.

However, a few key financial institutions have embraced patents enthusiastically. This week, the Chicago Board Options Exchange has taken finance-patent wars to a new level. CBOE filed a lawsuit against a competing options exchange, International Securities Exchange (ISE), demanding $525 million for the infringement of three patents: US Patent Nos. 7,356,498, 7,980,457 and 8,266,044. The board asked for the first patent in 1999, at the height of the patent-everything craze, and the patents were issued between 2008 and 2011.

In its complaint, the Chicago board says the patents cover its Quote Risk Monitor system. That lets traders "actively control their risk exposure" by telling CBOE the "risk threshold" they want to take on.

The bad blood and litigation between these two exchanges goes back years. The European-owned ISE was the first US all-electronic exchange when it opened in 2000. The Chicago Board Options Exchange was the first options exchange, period, when it was founded in 1973.

ISE first sued the Chicago board back in 2006, claiming infringement on its own patent—filed in 1999, just two months before CBOE's first patent filing. CBOE beat that lawsuit at the district court level, but this May, it was revived (PDF) by the nation's top patent appeals court. Now it looks like the lawsuit against Chicago is going to go forward, whether the exchange likes it or not—and filing their own "defensive" patent suit is the best way to get leverage.

The high-stakes suit-and-countersuit between two major options exchanges raises the question: will patent disputes infect the world of corporate finance like they have the tech world? A few years ago, tech companies had a sense that throwing patent suits at each other would simply result in massive lawyers' fees and a state of "mutually assured destruction." But with Apple and Microsoft seeking to gain an edge over competitors in the smartphone business, the detente has collapsed. High-stakes lawsuits are everywhere.

From a licensing dispute over "index options" to big-time patent battles

The patent suits seem to have grown out of an earlier dispute over licensing, which also reached a head this year. ISE had long wanted to offer "index options" tied to the Dow Jones Industrial Average and the S&P 500. Dow Jones & Co. had maintained that was a use of its intellectual property rights and required a license; McGraw-Hill Companies, which owns the S&P 500 Index, held the same position.

ISE tried to negotiate licenses for those but eventually gave up. In 2006, it went to court, saying it could sell options on those indexes even without negotiating the rights. "Competition among exchanges improves market efficiency and, ultimately, benefits investors,” said ISE CEO David Krell at the time.

Chicago Board Options Exchange, which is the only authorized dealer in DJIA and S&P 500 options, was also a party to that long-running lawsuit.

ISE tried to take that case to federal court, saying it was a copyright issue. The court sided with CBOE and the index owners, however, saying the claims for misappropriation and unfair competition weren't about "authorship."

That left the case in Illinois state courts, which sided with the Chicago exchange and its allies. The courts said that ISE shouldn't be allowed to "profit for free from the efforts, skill, and reputation of the Index Providers." ISE appealed that to a higher state court, but in May it lost there as well. In that case, Illinois judges allowed the index owners to lean on the controversial "hot news" doctrine, first enunciated in a 1918 case brought by The Associated Press against a competitor.

They're like a dissuasive weapon that stands for "Hey don't attack me and I will not have to use mine to crush you". But as their radioactive counterparts, if someone decide that it becomes a good option tu actually use them, everything can go thermonuclear quite fast.

My thoughts: what's an options market? Why is there one in Chicago? Why can't they do this at Wall Street? How come a financial entity owns patents????

There's just something sour in my mouth thinking of people who manipulate financial markets and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?

Now it looks like the lawsuit against Chicago is going to go forward, whether the exchange likes it or not—and filing their own "defensive" patent suit is the best way to get leverage.

I've never really got this idea of "defensive" patents, surely doing this doesn't really help, and can only antagonise the other party?

How is it leverage? Will it help find an amicable agreement? Or is it just a case of engaging in Total War, and maybe winning back some damages to make up for anything lost in the original case?

Can anyone help explain this to me?

Appeals and prior art arguments at a patent office can drag out for ages, so you'll lose just by being dragged into the whole mess. If you view a patent as a weapon of mass destruction, then defensive patents are like mutually assured destruction. You don't actively go out with the intention of suing everyone, but you keep the patents close, for use in a counter-suit or to invalid the other guy's patents. If your portfolio looks nasty enough, you might force them into a cross-licensing agreement, into dropping the suit, or even not suing you in the first place.

A well-publicized example is Google's purchase of Motorola- they hoped to fend Apple off with a collection of patents that Apple might be infringing.

Sigh..another day, another patents related lawsuit. When will this madness end and does the benefits really outweigh said madness!!

What "benefits"? A legal monopoly might benefit some shareholders, but it doesn't benefit consumers. And it appears that companies with monopolies tend to be pretty poor at turning them into money - witness the music industry and movie industry, both of which fail to innovate with their product.

As for patenting methods for betting on whether a company's share price will go up or down, how is that "innovative"?

Crazy stuff. Are there still people in the US who don't think their patent system is broken?

Postulator wrote:

Plasdom wrote:

Sigh..another day, another patents related lawsuit. When will this madness end and does the benefits really outweigh said madness!!

What "benefits"? A legal monopoly might benefit some shareholders, but it doesn't benefit consumers. And it appears that companies with monopolies tend to be pretty poor at turning them into money - witness the music industry and movie industry, both of which fail to innovate with their product.

As for patenting methods for betting on whether a company's share price will go up or down, how is that "innovative"?

Um, did you read the comment you quoted?Like you, the poster was AGAINST patents/litigation (and he didn't mention "innovation").

Now it looks like the lawsuit against Chicago is going to go forward, whether the exchange likes it or not—and filing their own "defensive" patent suit is the best way to get leverage.

I've never really got this idea of "defensive" patents, surely doing this doesn't really help, and can only antagonise the other party?

How is it leverage? Will it help find an amicable agreement? Or is it just a case of engaging in Total War, and maybe winning back some damages to make up for anything lost in the original case?

Can anyone help explain this to me?

M.A.D.

The other side has to believe you'll retaliate if they attack (also applies to future possible predators).Also if you can fight back with some good patents then even if you lose the first lawsuit you can mitigate some of the damage when it comes to making a deal.

Google is the perfect example: they stockpile patents but don't use them to sue anyone unless sued first.And it works - Apple would much rather sue handset makers than take on Google themselves.

I agree! When in the hell is this shit going to end with the benefactor being money every damn time?! It irks me that corporations have got this low as to act like a bunch a three year old fighting over a toy that their parents had just bought. Good grief! Grow a friggin' pair already! There's more to life than scwabbling about every little thing that comes to mind. (end of rant)

My thoughts: what's an options market? Why is there one in Chicago? Why can't they do this at Wall Street? How come a financial entity owns patents????

There's just something sour in my mouth thinking of people who manipulate financial markets and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?

Couldn't this same argument be applied to music or movies? 'There's just something sour in my mouth thinking of people who pretend to be somebody else and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?'

Sigh..another day, another patents related lawsuit. When will this madness end and does the benefits really outweigh said madness!!

What "benefits"? A legal monopoly might benefit some shareholders, but it doesn't benefit consumers. And it appears that companies with monopolies tend to be pretty poor at turning them into money - witness the music industry and movie industry, both of which fail to innovate with their product.

I think the idea is that a monopoly granted by a patent encourages development and creates an environment where companies feel it's worth developing new stuff. At it's core, the concept behind patents is a good one. The problems now seem to be caused by poorly defined and overly broad patents, especially on basic implementations that are not creative and have no product backing the patent.

Now it looks like the lawsuit against Chicago is going to go forward, whether the exchange likes it or not—and filing their own "defensive" patent suit is the best way to get leverage.

I've never really got this idea of "defensive" patents, surely doing this doesn't really help, and can only antagonise the other party?

How is it leverage? Will it help find an amicable agreement? Or is it just a case of engaging in Total War, and maybe winning back some damages to make up for anything lost in the original case?

Can anyone help explain this to me?

Appeals and prior art arguments at a patent office can drag out for ages, so you'll lose just by being dragged into the whole mess. If you view a patent as a weapon of mass destruction, then defensive patents are like mutually assured destruction. You don't actively go out with the intention of suing everyone, but you keep the patents close, for use in a counter-suit or to invalid the other guy's patents. If your portfolio looks nasty enough, you might force them into a cross-licensing agreement, into dropping the suit, or even not suing you in the first place.

A well-publicized example is Google's purchase of Motorola- they hoped to fend Apple off with a collection of patents that Apple might be infringing.

The the best defense to a patent suit is to not be violating the patent in the first place. What better way to say 'we don't do that' than your very own patent that covers what you are doing?

What "benefits"? A legal monopoly might benefit some shareholders, but it doesn't benefit consumers. And it appears that companies with monopolies tend to be pretty poor at turning them into money - witness the music industry and movie industry, both of which fail to innovate with their product.

That's copyright, not patents. And WTF are you on about? The music industry and the movie industry rake in millions.

Quote:

As for patenting methods for betting on whether a company's share price will go up or down, how is that "innovative"?

It's not. The patent office has been staffed by rubber stamp wielders for a number of years. That's the real root of the problem.

The the best defense to a patent suit is to not be violating the patent in the first place. What better way to say 'we don't do that' than your very own patent that covers what you are doing?

That doesn't necessarily work. Since the patent office stopped looking at prior art and started issuing duplicative and over-broad, overlapping patents for the same technology, you can have a patent and still be sued for somebody who got a prior patent or a later patent for the same damn thing.

The the best defense to a patent suit is to not be violating the patent in the first place. What better way to say 'we don't do that' than your very own patent that covers what you are doing?

That doesn't necessarily work. Since the patent office stopped looking at prior art and started issuing duplicative and over-broad, overlapping patents for the same technology, you can have a patent and still be sued for somebody who got a prior patent or a later patent for the same damn thing.

Its not about not getting sued, its about what you have in your defense. The original question I was about defensive patents.

Yes! Destroy another industry! The conflagration will have to get a heck of a lot bigger before congress can be bothered to do anything about it.

Also: "The board asked for the first patent in 1999, at the height of the patent-everything craze, and the patents were issued between 2008 and 2011." How is the patent system even supposed to function if it takes 9 years to get a patent issued? That's an eternity in these industries.

My thoughts: what's an options market? Why is there one in Chicago? Why can't they do this at Wall Street? How come a financial entity owns patents????

There's just something sour in my mouth thinking of people who manipulate financial markets and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?

The exchanges in Chicago originated in the 1800's and primarily were a place to trade food commodities (grain, bacon, eggs, butter, cattle, etc). They were supposed to help farmers and businesses that needed these raw materials find a place to meet up and trade (money for product). They also created the futures market, which allowed a person to lock in a price of the commodity regardless of the conditions in the future (maybe a drought wipes out the wheat crop, or farmers produce too much pork and the price of pork falls through the floor, etc).

Chicago really was one of the main hubs for the food industry back in the day, and so that is why it became so influential with this type of trading.

Trading options is very much like trading a future, which is why the CBOE has an options exchange. And they paid the DJIA and S&P500 people in order to offer the options on their index, which is the root of this whole argument.

As for why they own patents... why not? People tend to take advantage of every legal thing that they can to enrich themselves. If the government gives you a tax credit for having a child, the majority of people take it, even if they think the deficit should be lower and perhaps the taxes should be higher.

These types of patents are legally allowed (until a court invalidates them), so they got them. Good for them. It protects their business interests. Until there is a patent system reform, I don't feel that we should criticize businesses for obtaining patents, especially if it is for defense and may encourage a settlement.

(disclaimer: I live in Chicago and work technology in the finance industry, but not for any of the exchanges)

Sigh..another day, another patents related lawsuit. When will this madness end and does the benefits really outweigh said madness!!

What "benefits"? A legal monopoly might benefit some shareholders, but it doesn't benefit consumers. And it appears that companies with monopolies tend to be pretty poor at turning them into money - witness the music industry and movie industry, both of which fail to innovate with their product.

I think the idea is that a monopoly granted by a patent encourages development and creates an environment where companies feel it's worth developing new stuff. At it's core, the concept behind patents is a good one. The problems now seem to be caused by poorly defined and overly broad patents, especially on basic implementations that are not creative and have no product backing the patent.

I look forward to an example of an industry that has innovated as a result of patent protection. What we in fact see is stagnation, and resistance to any possible change. Even the pharmaceutical industry has decided that it makes more money repackaging paracetamol than inventing new drugs. GM crops take something that farmers have worked over millennia to improve, add one or two changes and then lock farmers into payment plans for what they used to get free from last year's crop. The software industry boomed without patent protection, now the small developer has to be careful not to tread on anyone else's toes accidentally, and the big player finds itself facing troll lawsuits. And who would want to be a smartphone maker at the moment?

Amoxicillin. Discovered by Beecham scientists and patented. Patent has expired. My son has an ear infection, this medicine after just 1 day has reduced his pain, and started beating back the infection. It cost $5 without insurance (which seems a pretty arbitrary amount.. it probably cost pennies to produce, but still cheap)

Patents give the knowledge to everyone. When the patent expires, everyone gains.

There are examples of abuse of patents, and those should be challenged. However, just imagine if everyone just kept all of their research a secret and nobody was able to figure it out? I'd be paying Beecham $$$ for the same drug. And nobody would have been able to discover an enhancement to it to make it even better.

My thoughts: what's an options market? Why is there one in Chicago? Why can't they do this at Wall Street? How come a financial entity owns patents????

There's just something sour in my mouth thinking of people who manipulate financial markets and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?

Couldn't this same argument be applied to music or movies? 'There's just something sour in my mouth thinking of people who pretend to be somebody else and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?'

I'm sorry but that isn't even worth a rebuttal. That's just dumb. I did not bring arts into this at all. You did. Then you answered yourself with a clever quip. Dumb.

Amoxicillin. Discovered by Beecham scientists and patented. Patent has expired. My son has an ear infection, this medicine after just 1 day has reduced his pain, and started beating back the infection. It cost $5 without insurance (which seems a pretty arbitrary amount.. it probably cost pennies to produce, but still cheap)

Patents give the knowledge to everyone. When the patent expires, everyone gains.

There are examples of abuse of patents, and those should be challenged. However, just imagine if everyone just kept all of their research a secret and nobody was able to figure it out? I'd be paying Beecham $$$ for the same drug. And nobody would have been able to discover an enhancement to it to make it even better.

No. If they had done the research and released it without patenting it, other companies would have analyzed it and produced a similar medicine and there would be competition in pricing.

The defensible argument is, given that scenario, would they have spent the money on the research in the first place?

Maybe, maybe not, depending on the level of profit earnable in the time they feel it would take for competitors to reverse engineer it, and the cost of the research in the first place.

My thoughts: what's an options market? Why is there one in Chicago? Why can't they do this at Wall Street? How come a financial entity owns patents????

There's just something sour in my mouth thinking of people who manipulate financial markets and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?

Couldn't this same argument be applied to music or movies? 'There's just something sour in my mouth thinking of people who pretend to be somebody else and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?'

I'm sorry but that isn't even worth a rebuttal. That's just dumb. I did not bring arts into this at all. You did. Then you answered yourself with a clever quip. Dumb.

No. If they had done the research and released it without patenting it, other companies would have analyzed it and produced a similar medicine and there would be competition in pricing.

The defensible argument is, given that scenario, would they have spent the money on the research in the first place?

Maybe, maybe not, depending on the level of profit earnable in the time they feel it would take for competitors to reverse engineer it, and the cost of the research in the first place.

So the question is, is society better off having scientists duplicate effort in order to discover a secret which they then also keep secret? Research done doesn't have to be shared. Having 2 companies producing the medicine wouldn't necessarily give you discounted medicine, especially if it is still very difficult for the 3rd company to enter the market. There are now 68 different name brands for Amoxicillin now, which is probably why it costs $5.

Patents are encouragement to people to share their research and ideas. There are other ways to protect ideas.

I feel that one of the main problems with the patent system today though is the length of time given for a particular patent. Software patents last the same amount of time as a Drug patent, but the useful life for a software patent is usually just a few years, whereas a drug patent is good for decades afterwards. After the patent expires, it should still be useful to society.

My thoughts: what's an options market? Why is there one in Chicago? Why can't they do this at Wall Street? How come a financial entity owns patents????

There's just something sour in my mouth thinking of people who manipulate financial markets and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?

What about it do you find distasteful? One person is providing a service that other people find helpful and are willing to pay for. What's wrong with that?

Well, at least the finance and banking industry seems to have better lobbying efforts than the tech industry. It may be a good thing for them to get embroiled in all this patent brouhaha: in the end, they might be the ones who persuade the legislative to fix patent law.

I just find the licensing fee odd. if these were mutual funds and not options I highly doubt they'd be able to collect that much money and not declare it a management fee, or be forced to file a prospectus outlining how the weighted indexes are built overtime.

My thoughts: what's an options market? Why is there one in Chicago? Why can't they do this at Wall Street? How come a financial entity owns patents????

There's just something sour in my mouth thinking of people who manipulate financial markets and somehow "make money". I'd rather they built a factory and came up with something cool they can manufacture and sell. But nope. That takes know-how and effort, eh?

What about it do you find distasteful? One person is providing a service that other people find helpful and are willing to pay for. What's wrong with that?

He's an idiot. You have to expect comments like that to come out whenever there is a post about finance on a primarily tech blog. You would be surprised how little some people know about what the purpose of Wall Street is, let alone what function options provide.

Amoxicillin. Discovered by Beecham scientists and patented. Patent has expired. My son has an ear infection, this medicine after just 1 day has reduced his pain, and started beating back the infection. It cost $5 without insurance (which seems a pretty arbitrary amount.. it probably cost pennies to produce, but still cheap)

Patents give the knowledge to everyone. When the patent expires, everyone gains.

There are examples of abuse of patents, and those should be challenged. However, just imagine if everyone just kept all of their research a secret and nobody was able to figure it out? I'd be paying Beecham $$$ for the same drug. And nobody would have been able to discover an enhancement to it to make it even better.

Are you saying it wouldn't have been discovered without patents? Are you saying it was okay for Beecham to charge exhorbitant prices while it was protected by patent? Are you saying there are no other ways than patents to get investment in drug research (noting a fairly large proportion of it is done by universities)?